Millions of Americans are trapped in debt, often in very different ways. It could be student loan debt, credit card debt, an untenable mortgage or a massive auto loan.
Whatever form your debt takes, it’s necessary for your financial wellbeing to pay it down or, ideally, wipe it out altogether.
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There are several ways to tackle debt, with one of the more aggressive methods being debt consolidation. This is the process of paying off numerous debts with a new loan or balance transfer credit card that is secured at a lower interest rate.
Though debt consolidation can be recommended at times by financial experts, it’s not a popular approach. In fact, many Americans simply aren’t interested in it. A recent survey by LendingTree found that just 52% of people with more than $6,000 in credit card debt have ever consolidated.
Why is there such resistance to consolidating debt, and when should you seriously consider exploring this option? Let’s get some insight from the experts.
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Concern That Debt Consolidation Will Hurt Your Credit Score
There can be a fear factor involved in the unwillingness to consider debt consolidation, chiefly surrounding the idea that it will harm your credit score. This isn’t an irrational fear because it is true, but you should also know exactly how this situation works. It might not be as bad as you anticipate.
“Some consumers are afraid of the harm that debt consolidation will do to their finances and they should be wary — this isn’t something they should go into blindly,” said Erika Kullberg, a personal finance expert and founder of Erika.com. “Debt consolidation can be really beneficial, but only under the right circumstances. Those who are afraid it will hurt their credit score are right,”
Kullberg added, though, “They will need to undergo a hard credit inquiry when they apply for a new loan or credit card. However, the drop they experience will be small and their score will recover relatively quickly.”
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Worry Over the Repayment Timeline Rules
Another reason people may be disinclined to consider debt consolidation is because debt consolidation loans or balance transfers come with a commitment to pay the debt off in a set period of time. Understandably, this can be intimidating.
“The low- or zero-interest promotional period that comes with balance-transfer cards is usually 6-12 months (it can be longer, but again is definite),” said Kyle Enright, president at Achieve. “Terms for personal loans are generally 24-60 months. That commitment comes with the need to create a spending plan and usually, do some belt-tightening.”
Bummed About the Interest Rate
You want to look for a debt consolidation loan that charges you a lower interest rate than what you are paying now (we’ll talk about that more later). But, rates on these loans can be pretty steep.
“The rate on a debt consolidation loan could range from 8-9% to 36% or even higher, depending on one’s credit,” Enright said. “In comparison, the average credit card interest rate now is close to 23%. So if you can get a rate on the loan of 9%, it represents a great savings over the credit card debt.”
He continued, “If, though, you can’t qualify for a good rate, a personal loan may not make as much sense. Make sure the lender is clear about the interest rate, and reviews the total savings over the life of the loan.”
When To Consider Debt Consolidation
Though there are valid reasons and certain situations where a debt consolidation plan isn’t right for you, there are times when they’re a great approach. Let’s break it down.
When You Want To Simplify Payments
When you consolidate your debt into one place, you’re effectively simplifying the payment process. This can go a long way in helping you tackle the debt and sharpen your budgeting prowess.
“Consolidating multiple debts into a single loan makes it easier to manage since you have just one fixed monthly payment to worry about,” said Leslie Tayne, founder and head attorney at Tayne Law Group.
When You Want To Make Fixed Repayments
One of the potential drawbacks of a debt consolidation loan is that they have a fixed repayment schedule, but this can also be a plus. “It can make payments more predictable and easier to fit in a budget,” Tayne said.
When You Want Lower Monthly Payments
Consider debt consolidation when you’re looking to extend a loan term, and in turn, nab lower monthly payments. “This can be helpful for those who are struggling with cash flow issues, though it might end up costing more in interest over time,” Tayne said.
When You Want To Avoid Default
“For those struggling to keep up with multiple debt payments, consolidation can be a strategic move to avoid defaulting on any one debt,” Tayne said.
Remember: Always Seek a Lower Interest Rate Than What You Have Now
When considering debt consolidation, it’s really important to explore your options and choose the right plan — this means one with a lower interest rate than what you’re currently dealing with.
“The goal here is to save money so you can pay off your debt faster,” Kullberg said. “You also don’t want to lengthen your repayment timeline since that leads to paying more in interest.”
She continued, “For example, with student loans, don’t trade a five-year term for a 10-year term, even if the interest rate is a bit better. Spending five more years paying off your debt will cost you in the end. For credit card debt consolidation, look for a balance transfer card that has a long 0% introductory APR. That way, you can spend months only focusing on paying off your balance without additional interest.”
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This article originally appeared on GOBankingRates.com: Why Most People Aren’t Interested in Debt Consolidation & When They Should Be